Reading "Between The Lines" In Annual Proxy Statements

Written by Paul R. Dorf, Ph. D., APD

Upper Saddle River, N.J. - May 11, 2005 - Now that a large number ofrepparttar proxy statements for public companies with fiscal years ending December 31, 2004 have been issued, those of us that scrutinize them for a living, as well as those that have invested in those companies, have an opportunity to analyze their executive pay packages in detail. With all ofrepparttar 151016 attention on Corporate Governance and how to improverepparttar 151017 level of transparency and insure that a strong relationship exists between pay and performance, these statements provide for interesting reading.

Many comb through these filings withrepparttar 151018 intent of learning ifrepparttar 151019 compensation is reflective ofrepparttar 151020 recent trends towards “pay-for-performance”. In reality, doesrepparttar 151021 compensation accurately reflectrepparttar 151022 company’s financial performance? And does it make sense? We also are interested in learning how companies are reacting torepparttar 151023 recent and anticipated changes in tax, accounting rules, and related legislation andrepparttar 151024 extent to which those changes are affecting executive compensation design.

With this in mind, we have been reading various recent filings, which when analyzed, still leaves some doubt ifrepparttar 151025 companies are being as open and straight forward as we have all hoped for. Unfortunately, there is still a tendency for companies to use ambiguous, unclear language. In some instances,repparttar 151026 linkage to performance is still questionable. The key is to read what has been presented in a very careful way, taking into consideration what is said, and in some instances, what is not said. Some examples from a recent proxy issued by a large company provide evidence of why it is important to read and interpret them very carefully:

“Our policy is to maximizerepparttar 151027 tax deductibility of compensation payments to (Top Management) under Section 162(m) ofrepparttar 151028 Internal Revenue Code andrepparttar 151029 regulations thereunder (Section 162(m)). Our shareholders have approved our incentive plans designed and administered to qualify compensation awarded thereunder as “performance-based”. We may, however, authorize payments to (Top Management) that may not be fully deductible if we believe such payments are in our shareholders’ interests.”

This means thatrepparttar 151030 programs are in compliance withrepparttar 151031 Internal Revenue Code §162(m); however, and it is a big HOWEVER, they may not qualify for exemption underrepparttar 151032 one million dollar cap, and therefore would not be deductible for tax purposes. We find it quite a stretch to see how that is inrepparttar 151033 shareholder’s interest, since a non-deductible expense reducesrepparttar 151034 company’s profitability.

Compensation Committee 101: What Does It Do?

Written by Paul R. Dorf, Ph. D., APD

Upper Saddle River, N.J. – June 8, 2005 - The increased focus onrepparttar size of Executive Compensation Packages and their apparent disconnect withrepparttar 151015 realities of company performance have placed tremendous concern on a company’s decision making process. Add to thatrepparttar 151016 issues of corporate governance, and you now have placedrepparttar 151017 Compensation Committee very much inrepparttar 151018 limelight. But what isrepparttar 151019 role ofrepparttar 151020 Compensation Committee?

The Compensation Committee is appointed by and serves in an advisory role to a company’s Board of Directors. It makesrepparttar 151021 important final decisions on many executive compensation matters, includingrepparttar 151022 types and particulars ofrepparttar 151023 pay plans themselves,repparttar 151024 amount of compensation, and evenrepparttar 151025 performance measures and specific targets upon whichrepparttar 151026 executives will be judged for purposes of calculating incentive awards. In its capacity,repparttar 151027 Committee is responsible for functioning both in a strategic role, as well as serving in an administrative capacity. Strategically,repparttar 151028 Committee must consider howrepparttar 151029 achievement of overall corporate goals and objectives can best be supported throughrepparttar 151030 use of specific compensation programs that will support a pay-for-performance environment. From an administrative standpoint,repparttar 151031 Compensation Committee must undertakerepparttar 151032 necessary studies, evaluate alternatives plans, recommend elements ofrepparttar 151033 Executive Compensation Package including, salary programs, short-term and long-term incentives, and supplemental benefits and perquisites forrepparttar 151034 Corporate Officers. Ultimately,repparttar 151035 Committee ensures that these programs are installed and administered in such a way as to achieverepparttar 151036 desired results.

The following arerepparttar 151037 primary duties and responsibilities typically assigned torepparttar 151038 Compensation Committee byrepparttar 151039 Board:

·Developrepparttar 151040 Compensation Philosophy forrepparttar 151041 Company and ensure that it is consistent withrepparttar 151042 company’s business strategy, mission, and culture.

·Approve any compensation plans in which Officers and Directors are eligible to participate, subject torepparttar 151043 review ofrepparttar 151044 full Board and shareholders, as appropriate.

·Responsible for recommending, providing oversight, and approving awards of stock options and other equity, perquisites and other benefits, and employment and change of control contracts, subject to Board and shareholder approval, as required.

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